Question

List and give a real life example of each of the four types of market failure (i.e. the reasons that we need government intervention).

• Public Goods
• Externalities
• Market power (monopolies)
• Inequities

Answer 1

Market failures exist where the market forces of demand and supply do not deliver efficient outcomes.

Public Goods: Public goods create strong positive externalities. Thus, there is an underproduction of such goods if these are left to the private sector. Government intervention is required to increase the level of production.

Externalities: Externalities are side effects of consumption or production. Thus, there is either underproduction or overproduction. Negative externalities in the market create the overproduction in economy. Thus, government intervention in forms of subsidies or taxes would correct such inefficiencies prevailing in the market.

Market Power: Firm having market power does not produce at an efficient level. Firm produces at the MR=MC and efficient level is achieved where P = MC. Thus, firms must be made to produce at the level where P = MC.

Inequities: inequities are caused by the inequal distributions of national income. Thus, government must make intervention in forms of social upliftment programme.